Increased Demand for CDs On the Horizon
September 22, 2009
There is a lot of talk in the financial press these days about "cash on the sidelines." Usually, cash on the sidelines is mentioned as a reason why stocks will continue to rise as more buyers enter the market.
But what if a lot of that cash goes into CDs? It's very possible.
Cash on the Sidelines Less Safe Today Than It Was Yesterday
Cash on the sidelines mostly refers to money being held in money market mutual funds. Nearly $3.5 trillion is stored in MMMFs as of today. But that figure declined by $62.6 billion in the last week.
Not coincidentally, the U.S. government ended its guarantee of money market mutual funds last week, on September 18.
In short, money market funds are not as safe as they used to be.
CDs Just as Safe as They Were Yesterday
The average money market mutual fund is yielding 0.06 percent right now. Investors in money market funds--which are NOT THE SAME as money market accounts--are obviously pursuing a low-risk strategy.
With the government pulling the insurance policy on money market funds, moving that cash on the sidelines into CDs may look appealing to the risk-averse investor. For instance, someone approaching retirement savings who wants to protect their retirement savings.
For such a person, the $250,000 per depositor per institution FDIC insurance on CDs is a great selling point.
